Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Organization
The Company’s equipment operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The equipment operations manufacture and distribute a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. The Company’s financial services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the equipment operations. In addition, financial services offers extended equipment warranties. The information in the following discussion is presented in a format that includes information grouped as consolidated, equipment operations, and financial services. The Company’s operating segments consist of production and precision agriculture, small agriculture and turf, construction and forestry, and financial services.
Trends and Economic Conditions for Fiscal Year 2022
Industry sales of large agricultural machinery in the U.S. and Canada are expected to be up about 20 percent. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat. Industry sales of agricultural machinery in Europe are forecast to be up about 5 percent. In South America, industry sales of tractors and combines are projected to be up about 10 percent. Asia industry sales of agricultural machinery are forecast to be down moderately. Construction equipment industry sales in the U.S. and Canada for 2022 are expected to increase about 10 percent, while compact construction equipment industry sales in the U.S. and Canada are anticipated to be flat to up 5 percent. Forestry global industry equipment sales are expected to be flat to up 5 percent. Global industry roadbuilding equipment sales are forecasted to be flat to up 5 percent. Net income for the Company’s financial services operations is expected to be slightly lower than fiscal year 2021 due to a higher provision for credit losses and higher selling, administrative, and general expenses. These factors are expected to be partially offset by income earned on a higher average portfolio.
Items of concern include global and regional political conditions, economic and trade policies, inflationary pressures, the ongoing pandemic, capital market disruptions, changes in demand and pricing for new and used equipment, and the other items discussed in the “Forward-Looking Statements” below. Significant fluctuations in foreign currency exchange rates, volatility in the price of many commodities, and supply chain disruptions could also impact the Company’s results.
The Company’s second quarter results reflect strong demand while enduring supply chain pressures continue to impact production levels and delivery schedules. The Company’s employees, suppliers, and dealers are working to address these challenges. The demand for agricultural equipment is expected to benefit from positive fundamentals despite availability concerns and inflationary pressures affecting customers’ input costs. The Company’s smart industrial operating model and recently announced financial and sustainability goals (Leap Ambitions) are focused on helping customers manage higher costs and increasingly scarce inputs, while improving agricultural yields, through the use of the Company’s integrated technologies.
Impact of Events in Russia / Ukraine
The recent events in Russia / Ukraine have impacted the safety, welfare, and well-being of the Company’s employees in the region. The Company’s top priority is to support and maintain close communication with its affected teams, providing necessary resources when possible. The Company has suspended shipments of machines and service parts to Russia. These events are impacting business continuity, liquidity, and asset values for the Company’s operations in Russia / Ukraine (see Note 20).
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2022 Compared with 2021
Three Months Ended
Six Months Ended
Deere & Company
May 1
May 2
%
May 1
May 2
%
(In millions of dollars, except per share amounts)
2022
2021
Change
2022
2021
Change
Net sales and revenues
$
13,370
$
12,058
+11
$
22,939
$
21,170
+8
Net income attributable to Deere & Company
2,098
1,790
+17
3,001
3,013
Diluted earnings per share
6.81
5.68
9.72
9.55
Results for the second quarter of 2022 and year-to-date periods of 2022 and 2021 were impacted by special items. See Note 20 for more information on special items impacting the presented periods. The discussion on net sales and operating profit is included in the Business Segment Results below.
Three Months Ended
Six Months Ended
Deere & Company
May 1
May 2
%
May 1
May 2
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Cost of sales to net sales
74.1%
72.1%
75.9%
72.1%
Other income
$
540
$
251
+115
$
779
$
477
+63
Research and development expenses
453
377
+20
855
743
+15
Selling, administrative and general expenses
932
838
+11
1,713
1,607
+7
Other operating expenses
328
335
-2
638
708
-10
Provision for income taxes
461
530
-13
710
838
-15
The cost of sales to net sales ratio increased in the second quarter and the first six months of fiscal 2022 primarily due to higher production costs partially offset by price realization. Other income increased in both periods due to a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture. Research and development expenses were higher for both periods due to continued focus on developing and incorporating technology solutions. Selling, administrative, and general expenses increased in the second quarter and the first six months primarily due to a higher provision for credit losses, including higher reserves due to the events in Russia / Ukraine. Other operating expenses decreased in the first six months primarily due to lower depreciation of equipment on operating leases and lower retirement benefit costs. The provision for income taxes decreased in both periods due in part to a final U.S. tax regulation resulting in the release of a foreign tax credit valuation allowance.
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Business Segment Results
Three Months Ended
Six Months Ended
Production and Precision Agriculture
May 1
May 2
%
May 1
May 2
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
5,117
$
4,529
+13
$
8,473
$
7,599
+12
Operating profit
1,057
1,007
+5
1,353
1,651
-18
Operating margin
20.7%
22.2%
16.0%
21.7%
Price realization
+11
+10
Currency translation
-1
Production and precision agriculture sales increased for the quarter due to price realization and higher shipment volumes. Operating profit rose primarily due to price realization and higher shipment volumes / sales mix. These items were partially offset by higher production costs, higher research and development and selling, administrative, and general expenses, and impairments related to events in Russia / Ukraine.
Sales for the first six months increased mainly as a result of price realization and higher shipment volumes. Operating profit for the first six months decreased primarily resulting from higher production costs, higher research and development and selling, administrative, and general expenses, the UAW contract ratification bonus, and the impact of impairments related to events in Russia / Ukraine. Partially offsetting these factors were price realization and higher shipment volumes / sales mix. The prior year was also impacted by a favorable indirect tax ruling in Brazil.
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Three Months Ended
Six Months Ended
Small Agriculture and Turf
May 1
May 2
%
May 1
May 2
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
3,570
$
3,390
+5
$
6,201
$
5,904
+5
Operating profit
520
648
-20
891
1,117
-20
Operating margin
14.6%
19.1%
14.4%
18.9%
Price realization
+8
+7
Currency translation
-2
-2
Small agriculture and turf sales for the quarter increased due to price realization partially offset by the unfavorable impact of currency translation. Operating profit decreased primarily due to higher production costs, a less favorable sales mix, and higher selling, administrative, and general and research and development expenses. These items were partially offset by price realization.
Sales for the first six months increased mainly as a result of price realization partially offset by the unfavorable impact of currency translation. Operating profit for the first six months decreased primarily resulting from higher production costs, a less favorable sales mix, and higher selling, administrative, and general and research and development expenses. Partially offsetting these factors was price realization.
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Three Months Ended
Six Months Ended
Construction and Forestry
May 1
May 2
%
May 1
May 2
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
3,347
$
3,079
+9
$
5,891
$
5,546
+6
Operating profit
814
489
+66
1,085
756
+44
Operating margin
24.3%
15.9%
18.4%
13.6%
Price realization
+10
+9
Currency translation
-2
-2
Construction and forestry sales moved higher for the quarter primarily due to price realization and higher shipment volumes, partially offset by the unfavorable impact of currency translation. Operating profit increased due to a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture and price realization. These items were partially offset by higher production costs, impairments related to the events in Russia / Ukraine, and a less favorable product mix.
The segment’s six-month sales also increased due to price realization partially offset by the unfavorable impact of currency translation. The first six-month’s operating profit moved higher mainly due to price realization and a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture, partially offset by higher production costs.
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Three Months Ended
Six Months Ended
Financial Services
May 1
May 2
%
May 1
May 2
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Revenue (including intercompany)
$
951
$
954
$
1,867
$
1,888
-1
Interest expense
112
181
-38
270
369
-27
Net income
208
222
-6
439
427
+3
While the average balance of receivables and leases financed was 6 percent higher in the second quarter and the first six months of 2022 compared with the same periods last year, revenues decreased slightly due to lower financing rates. Gains on operating lease dispositions also benefited revenue in both periods. Interest expense decreased in the second quarter and first six months of 2022 primarily as a result of non-designated derivative gains and lower average borrowing rates. Net income decreased for the quarter mainly due to higher reserves for credit losses related to the events in Russia / Ukraine, partially offset by income earned on a higher average portfolio. Results for the first six months increased slightly due to income earned on higher average portfolio balances and an improvement on operating lease residual values, partially offset by higher reserves for credit losses related to the events in Russia / Ukraine. Both periods of the prior year also benefited from a favorable adjustment to the provision for credit losses.
Critical Accounting Estimates
See the Company’s critical accounting estimates discussed in the Management’s Discussion and Analysis of the most recently filed Annual Report on Form 10-K. There have been no material changes to these estimates.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company’s consolidated totals, equipment operations, and financial services operations.
Consolidated
Cash outflows from consolidated operating activities in the first six months of 2022 were $1,762 million. This resulted mainly from a working capital change and a $1,000 million voluntary contribution to a U.S. OPEB plan. These were partially offset by net income adjusted for non-cash provisions. Cash outflows from investing activities were $1,888 million in the first six months of 2022. The primary driver was the cost of receivables and equipment on operating leases acquired exceeding collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases; acquisition of businesses, net of cash acquired; purchases of property and equipment; and a change in collateral on derivatives – net. Cash outflows from financing activities were $386 million in the first six months of 2022. Cash, cash equivalents, and restricted cash decreased $4,146 million during the first six months of this year.
Positive cash flows from consolidated operating activities in the first six months of 2021 were $1,786 million. This resulted primarily from net income adjusted for non-cash provisions and a change in net accrued income taxes payable/receivable, partially offset by changes in working capital. Cash outflows from investing activities were $1,387 million in the first six months of 2021, primarily due to the cost of receivables and equipment on operating leases acquired exceeding collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases, purchases of property and equipment, and a change in collateral on derivatives – net. Negative cash flows from financing activities were $441 million in the first six months of 2021. Cash, cash equivalents, and restricted cash increased $109 million during the first six months of 2021.
The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs in the short term and long term. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets), and committed and uncommitted bank lines of credit. The Company’s commercial paper outstanding at May 1, 2022, October 31, 2021, and May 2, 2021 was $3,403 million, $2,230 million, and $2,259 million, respectively. The total cash, cash equivalents, and marketable securities position was $4,560 million, $8,745 million, and $7,850 million, respectively. The total cash and cash equivalents and marketable securities held by foreign subsidiaries was $2,606 million, $5,817 million, and $4,972 million at May 1, 2022, October 31, 2021, and May 2, 2021, respectively. During the first quarter of 2022, the Company’s foreign subsidiaries returned $3,500 million of cash and cash equivalents to the U.S. In May 2022, the Company’s foreign subsidiaries returned $848 million of cash and cash equivalents to the U.S.
Lines of Credit . The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $8,568 million at May 1, 2022, $4,608 million of which were unused. For the
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purpose of computing unused credit lines, commercial paper, and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were primarily considered to constitute utilization. Included in the total credit lines at May 1, 2022 was a 364-day credit facility agreement of $3,000 million expiring in the second quarter of 2023. In addition, total credit lines included long-term credit facility agreements of $2,500 million expiring in the second quarter of 2026 and $2,500 million expiring in the second quarter of 2027. These credit agreements require John Deere Capital Corporation (Capital Corporation) to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio of total debt to total capital (total debt and stockholders’ equity excluding accumulated other comprehensive income (loss)) of 65 percent or less at the end of each fiscal quarter. Under this provision, the Company’s excess equity capacity and retained earnings balance free of restriction at May 1, 2022 was $16,783 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $31,169 million at May 1, 2022. All of these credit agreement requirements have been met during the periods included in the financial statements.
Debt Ratings . To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are as follows:
Senior
Long-Term
Short-Term
Outlook
Fitch Ratings
A
F1
Stable
Moody’s Investors Service, Inc.
A2
Prime-1
Stable
Standard & Poor’s
A
A-1
Stable
Trade Accounts and Notes Receivable. Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables increased $2,050 million during the first six months of 2022, primarily due to a seasonal increase and higher overall demand, partially offset by the effect of foreign currency translation. These receivables increased $100 million, compared to a year ago. The ratios of trade accounts and notes receivable to the last 12 months’ net sales were 15 percent at May 1, 2022, compared to 11 percent at October 31, 2021 and 17 percent at May 2, 2021. Production and precision agriculture trade receivables decreased $6 million, small agriculture and turf trade receivables decreased $83 million, and construction and forestry trade receivables increased $189 million, compared to a year ago. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at May 1, 2022, 1 percent at October 31, 2021, and 2 percent at May 2, 2021.
Equipment Operations
The Company’s equipment businesses are capital intensive and are subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The equipment operations sell a significant portion of their trade receivables to financial services. Funds provided from operations are supplemented by external financing sources as needed.
Cash used for operating activities of the equipment operations, including intercompany cash flows, in the first six months of 2022 was $646 million. This resulted primarily from a working capital change and a $1,000 million voluntary contribution to a U.S. OPEB plan. Partially offsetting these operating cash outflows were cash inflows from net income adjusted for non-cash provisions. Cash used for financing activities was $2,401 million in the first six months of 2022 primarily due to repurchases of common stock of $1,226 million, dividends paid of $649 million, and a decrease in borrowings of $549 million. Cash, cash equivalents, and restricted cash decreased $4,018 million in the first six months of 2022.
Cash provided by operating activities of the equipment operations, including intercompany cash flows, in the first six months of 2021 was $2,507 million. This resulted primarily from cash inflows from net income adjusted for non-cash provisions, partially offset by a change in working capital. Cash used for financing activities was $2,118 million in the first six months of 2021 primarily due to repurchases of common stock of $1,044 million, a decrease
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in borrowings of $676 million, and dividends paid of $480 million. Cash, cash equivalents, and restricted cash increased $138 million in the first six months of 2021.
Trade receivables held by the equipment operations increased $203 million during the first six months of 2022 and increased $133 million from a year ago. The equipment operations sell a significant portion of their trade receivables to financial services. See the previous consolidated discussion of trade receivables.
Inventories increased by $2,249 million during the first six months of 2022 and increased by $2,988 million compared to a year ago. The higher levels in both periods are due to increased overall demand and the impact of supply chain disruptions, partially offset by foreign currency translation. A majority of these inventories are valued on the last-in, first-out (LIFO) method.
Total interest-bearing debt, excluding finance lease liabilities, of the equipment operations was $10,057 million at May 1, 2022, compared with $10,373 million at October 31, 2021 and $10,421 million at May 2, 2021. The ratios of debt to total capital (total interest-bearing debt and Deere & Company’s stockholders’ equity) were 35 percent, 36 percent, and 41 percent at May 1, 2022, October 31, 2021, and May 2, 2021, respectively.
Property and equipment cash expenditures for the equipment operations in the first six months of 2022 were $345 million, compared with $319 million in the same period last year. Capital expenditures for the equipment operations in 2022 are estimated to be approximately $1,175 million.
Financial Services
The financial services operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of commercial paper, term debt, securitization of retail notes, equity capital, and borrowings from Deere & Company.
During the first six months of 2022 and 2021, the cash provided by operating and financing activities was used for investing activities. Cash, cash equivalents, and restricted cash decreased $128 million in the first six months of 2022 and decreased $29 million in the first six months of 2021.
Receivables and leases held by the financial services operations consist of retail notes originated in connection with financing of new and used equipment, operating leases, trade receivables, revolving charge accounts, sales-type and direct financing leases, and wholesale notes. Trade and financing receivables and equipment on operating leases increased $1,389 million during the first six months of 2022 and increased $2,330 million in the past 12 months primarily due to higher sales. Total acquisition volumes of receivables (excluding trade and wholesale) and leases were 1 percent higher in the first six months of 2022, compared with the same period last year, as volumes of revolving charge accounts were higher, while volumes of retail notes, financing leases, and operating leases were lower. The amount of total trade receivables and wholesale notes increased compared to October 31, 2021 and decreased compared to May 2, 2021.
Total external interest-bearing debt of the financial services operations was $38,751 million at May 1, 2022, compared with $37,978 million at October 31, 2021 and $36,873 million at May 2, 2021. Total external borrowings have changed generally corresponding with the level of receivable and lease portfolio, the level of cash and cash equivalents, the change in payables owed to Deere & Company, and the change in investment from Deere & Company. The financial services operations’ ratio of interest-bearing debt, including intercompany debt, to stockholder’s equity was 7.8 to 1 at May 1, 2022, compared with 7.8 to 1 at October 31, 2021 and 7.7 to 1 at May 2, 2021. The long-term portion of payables due to Deere & Company was $716 million at May 1, 2022 and $584 million at October 31, 2021.
Capital Corporation has a revolving warehouse facility to utilize bank conduit facilities to securitize retail notes (see Note 9). The facility was renewed in November 2021 with an expiration in November 2022 and a reduction of the total capacity or “financing limit” from $2,000 million to $1,000 million. As a result of the reduced capacity, Capital Corporation repurchased $511 million of outstanding short-term securitization borrowings in November 2021, in addition to the normal payments collected on the retail notes. At May 1, 2022, $760 million of securitization borrowings was outstanding under the facility. At the end of the contractual revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected.
In the first six months of 2022, the financial services operations issued $1,224 million and retired $1,818 million of retail note securitization borrowings, which are presented in Increase in total short-term borrowings on the statements of consolidated cash flows. In addition, during the first six months of 2022, the financial services operations issued $4,243 million and retired $3,317 million of long-term borrowings, which were primarily medium-
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term notes. In April 2022, the Company’s financial services operations issued $600 million of sustainability-linked medium-term notes with an initial interest rate of 3.35 percent, which are due in 2029. This transaction supports the Company’s commitment to environmental sustainability by linking financing to the achievement of its ambitious and comprehensive environmental, social, and governance (ESG) targets. Failure to meet the stated sustainability performance target will result in a 25-basis point increase to the interest rate payable on the 2029 notes from and including April 2026.
Subsequent Event
On May 25, 2022, the Company’s Board of Directors declared a quarterly dividend of $1.13 per share payable August 8, 2022 to stockholders of record on June 30, 2022. The new quarterly rate represents an additional 8 cents per share over the previous level, an increase of approximately 8 percent.
Forward-Looking Statements
Certain statements contained herein, including in the section entitled “ Overview ” relating to future events, expectations, and trends constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 and involve factors that are subject to change, assumptions, risks, and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect all lines of the Company’s operations, generally, while others could more heavily affect a particular line of business.
Forward-looking statements are based on currently available information and current assumptions, expectations, and projections about future events. Except as required by law, the Company undertakes no obligation to update or revise its forward-looking statements. Further information concerning the Company and its businesses, including factors that could materially affect the Company’s financial results, is included in the Company’s other filings with the SEC (including, but not limited to, the factors discussed in Item 1A. “Risk Factors” of the Company’s most recent Annual Report on Form 10-K and the Company’s subsequent Quarterly Reports on Form 10-Q).
Factors Affecting All Lines of Business
All of the Company’s businesses and their results are affected by general economic conditions in the global markets and industries in which the Company operates; customer confidence in general economic conditions; government spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; changing interest rates; inflation and deflation rates; changes in weather and climate patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts, including the current military conflict between Russia and Ukraine; natural disasters; and the spread of major epidemics or pandemics (including the COVID-19 pandemic).
Significant changes in market liquidity conditions, changes in the Company’s credit ratings, and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of the Company’s products and purchase decisions, financing and repayment practices, and the number and size of customer delinquencies and defaults. A debt crisis in Europe, Latin America, or elsewhere could negatively impact currencies, global financial markets, funding sources and costs, asset and obligation values, customers, suppliers, and demand for equipment. The Company’s investment management activities could be impaired by changes in the equity, bond, and other financial markets, which would negatively affect earnings.
Additional factors that could materially affect the Company’s operations, access to capital, expenses, and results include changes in, uncertainty surrounding, and the impact of governmental trade, banking, monetary, and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs, governmental programs, policies, and tariffs for the benefit of certain industries or sectors; retaliatory actions to such changes in trade, banking, monetary, and fiscal policies; actions by central banks; actions by financial and securities regulators; actions by environmental, health, and safety regulatory agencies, including those related to engine emissions, carbon and other greenhouse gas emissions, and the effects of climate change; changes to GPS radio frequency bands or their permitted uses; changes in labor and immigration regulations; changes to accounting standards; changes in tax rates, estimates, laws, and regulations and Company actions related thereto; changes to and compliance with privacy, banking, and other regulations; changes to and compliance with economic sanctions, or countersanctions, and export controls laws and regulations; and compliance with U.S. and foreign laws when expanding to new markets and otherwise.
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Other factors that could materially affect the Company’s results and operations include security breaches, cybersecurity attacks, technology failures, and other disruptions to the information technology infrastructure of the Company and its suppliers and dealers; security breaches with respect to the Company’s products; production, design, and technological innovations and difficulties, including capacity and supply constraints and prices; the loss of or challenges to intellectual property rights, whether through theft, infringement, counterfeiting, or otherwise; the availability and prices of strategically sourced materials, components, and whole goods; delays or disruptions in the Company’s supply chain, including work stoppages or disputes by suppliers with their unionized labor; the failure of customers, dealers, suppliers, or the Company to comply with laws, regulations, and Company policy pertaining to employment, human rights, health, safety, the environment, sanctions, export controls, anti-corruption, privacy and data protection, and other ethical business practices; introduction of legislation that could affect the Company’s business model and intellectual property, such as right to repair or right to modify; events that damage the Company’s reputation or brand; significant investigations, claims, lawsuits, or other legal proceedings; start-up of new plants and products; the success of new product initiatives or business strategies; changes in customer product preferences and sales mix; gaps or limitations in rural broadband coverage, capacity, and speed needed to support technology solutions; oil and energy prices, supplies, and volatility; the availability and cost of freight; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices, especially as to levels of new and used field inventories; changes in demand and pricing for used equipment and resulting impacts on lease residual values; labor relations and contracts, including work stoppages and other disruptions; changes in the ability to attract, develop, engage, and retain qualified personnel; acquisitions and divestitures of businesses; greater-than-anticipated transaction costs; the integration of acquired businesses; the failure or delay in closing or realizing anticipated benefits of acquisitions, joint ventures, or divestitures; the inability to deliver precision technology and agricultural solutions to customers; and the failure to realize anticipated savings or benefits of cost reduction, productivity, or efficiency efforts.
COVID-19
Uncertainties related to the continued effects of the COVID-19 pandemic have adversely affected and may continue to affect the Company’s business and outlook. These uncertainties include, among other things: the duration and impact of any resurgence in COVID-19; disruptions in the supply chain, including those caused by industry capacity constraints, material availability, and global logistics delays and constraints arising from, among other things, the transportation capacity of ocean shipping containers, and continued disruptions in the operations of one or more key suppliers, or the failure of any key suppliers; and an increasingly competitive labor market due to a sustained labor shortage or increased turnover caused by the COVID-19 pandemic. The sustainability of the economic recovery from the pandemic remains unclear and significant volatility could continue for a prolonged period.
Agricultural Equipment Operations
The Company’s agricultural equipment operations are subject to a number of uncertainties, including certain factors that affect farmers’ confidence and financial condition. These factors include demand for agricultural products; world grain stocks; soil conditions; harvest yields; prices for commodities and livestock; crop and livestock production expenses; availability of fertilizer; availability of transport for crops; trade restrictions and tariffs; global trade agreements; the level of farm product exports; the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production); real estate values; available acreage for farming; changes in government farm programs and policies; international reaction to such programs; changes in and effects of crop insurance programs; changes in environmental regulations and their impact on farming practices; animal diseases and their effects on poultry, beef, and pork consumption and prices on livestock feed demand; and crop pests and diseases.
Production and Precision Agriculture Operations
The production and precision agriculture operations rely in part on hardware and software, guidance, connectivity and digital solutions, and automation and machine intelligence. Many factors contribute to the Company’s precision agriculture sales and results, including the impact to customers’ profitability and/or sustainability outcomes; the rate of adoption and use by customers; availability of technological innovations; speed of research and development; effectiveness of partnerships with third parties; and the dealer channel’s ability to support and service precision technology solutions.
Small Agriculture and Turf Equipment
Factors affecting the Company’s small agriculture and turf equipment operations include customer profitability; labor supply; consumer borrowing patterns; consumer purchasing preferences; housing starts and supply; infrastructure investment; spending by municipalities and golf courses; and consumable input costs.
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Construction and Forestry
Factors affecting the Company’s construction and forestry equipment operations include consumer spending patterns; real estate and housing prices; the number of housing starts; interest rates; commodity prices such as oil and gas; the levels of public and non-residential construction; and investment in infrastructure. Prices for pulp, paper, lumber, and structural panels affect sales of forestry equipment.
John Deere Financial
The liquidity and ongoing profitability of John Deere Capital Corporation and the Company’s other financial services subsidiaries depend on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of the Company’s products. If general economic conditions deteriorate or capital markets become more volatile, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact write-offs and provisions for credit losses.
Supplemental Consolidating Information
The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represent the enterprise without financial services. The equipment operations include the Company’s production and precision agriculture operations, small agriculture and turf operations, construction and forestry operations, and other corporate assets, liabilities, revenues, and expenses not reflected within financial services. Transactions between the equipment operations and financial services have been eliminated to arrive at the consolidated financial statements.
The equipment operations and financial services participate in different industries. The equipment operations primarily generate earnings and cash flows by manufacturing and selling equipment, service parts, and technology solutions to dealers and retail customers. Financial services primarily finances sales and leases by dealers of new and used equipment that is largely manufactured by the Company. Those earnings and cash flows generally are the difference between the finance income received from customer payments less interest expense, and depreciation on equipment subject to an operating lease. These two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.
43
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA
STATEMENTS OF INCOME
For the Three Months Ended May 1, 2022 and May 2, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Net Sales and Revenues
Net sales
$
12,034
$
10,998
$
12,034
$
10,998
Finance and interest income
36
29
$
847
$
853
$
(87)
$
(73)
796
809
1
Other income
584
228
104
101
(148)
(78)
540
251
2
Total
12,654
11,255
951
954
(235)
(151)
13,370
12,058
Costs and Expenses
Cost of sales
8,919
7,929
(1)
(1)
8,918
7,928
3
Research and development expenses
453
377
453
377
Selling, administrative and general expenses
753
734
181
107
(2)
(3)
932
838
3
Interest expense
97
100
112
181
(22)
(13)
187
268
4
Interest compensation to Financial Services
62
60
(62)
(60)
4
Other operating expenses
99
40
377
369
(148)
(74)
328
335
5
Total
10,383
9,240
670
657
(235)
(151)
10,818
9,746
Income before Income Taxes
2,271
2,015
281
297
2,552
2,312
Provision for income taxes
387
454
74
76
461
530
Income after Income Taxes
1,884
1,561
207
221
2,091
1,782
Equity in income of unconsolidated affiliates
5
7
1
1
6
8
Net Income
1,889
1,568
208
222
2,097
1,790
Less: Net loss attributable to noncontrolling interests
(1)
(1)
Net Income Attributable to Deere & Company
$
1,890
$
1,568
$
208
$
222
$
2,098
$
1,790
1 Elimination of financial services’ interest income earned from equipment operations.
2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases.
3 Elimination of intercompany service fees.
4 Elimination of equipment operations’ interest expense to financial services.
5 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
44
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF INCOME
For the Six Months Ended May 1, 2022 and May 2, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Net Sales and Revenues
Net sales
$
20,565
$
19,049
$
20,565
$
19,049
Finance and interest income
70
62
$
1,675
$
1,716
$
(150)
$
(134)
1,595
1,644
1
Other income
801
447
192
172
(214)
(142)
779
477
2
Total
21,436
19,558
1,867
1,888
(364)
(276)
22,939
21,170
Costs and Expenses
Cost of sales
15,614
13,735
(1)
(1)
15,613
13,734
3
Research and development expenses
855
743
855
743
Selling, administrative and general expenses
1,410
1,387
307
224
(4)
(4)
1,713
1,607
3
Interest expense
188
195
270
369
(41)
(26)
417
538
4
Interest compensation to Financial Services
106
108
(106)
(108)
4
Other operating expenses
138
107
712
738
(212)
(137)
638
708
5
Total
18,311
16,275
1,289
1,331
(364)
(276)
19,236
17,330
Income before Income Taxes
3,125
3,283
578
557
3,703
3,840
Provision for income taxes
568
706
142
132
710
838
Income after Income Taxes
2,557
2,577
436
425
2,993
3,002
Equity in income of unconsolidated affiliates
5
10
3
2
8
12
Net Income
2,562
2,587
439
427
3,001
3,014
Less: Net income attributable to noncontrolling interests
1
1
Net Income Attributable to Deere & Company
$
2,562
$
2,586
$
439
$
427
$
3,001
$
3,013
1 Elimination of financial services’ interest income earned from equipment operations.
2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases.
3 Elimination of intercompany service fees.
4 Elimination of equipment operations’ interest expense to financial services.
5 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
45
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
CONDENSED BALANCE SHEETS
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
May 1
Oct 31
May 2
May 1
Oct 31
May 2
May 1
Oct 31
May 2
May 1
Oct 31
May 2
2022
2021
2021
2022
2021
2021
2022
2021
2021
2022
2021
2021
Assets
Cash and cash equivalents
$
3,167
$
7,188
$
6,282
$
711
$
829
$
900
$
3,878
$
8,017
$
7,182
Marketable securities
2
3
5
680
725
663
682
728
668
Receivables from Financial Services
5,669
5,564
5,955
$
(5,669)
$
(5,564)
$
(5,955)
6
Trade accounts and notes receivable – net
1,358
1,155
1,225
6,079
3,895
6,222
(1,179)
(842)
(1,289)
6,258
4,208
6,158
7
Financing receivables – net
49
73
99
34,036
33,726
30,895
34,085
33,799
30,994
Financing receivables securitized – net
6
10
15
4,067
4,649
4,092
4,073
4,659
4,107
Other receivables
1,944
1,629
1,369
405
159
162
(43)
(23)
(27)
2,306
1,765
1,504
7
Equipment on operating leases – net
6,465
6,988
7,108
6,465
6,988
7,108
Inventories
9,030
6,781
6,042
9,030
6,781
6,042
Property and equipment – net
5,678
5,783
5,667
37
37
37
5,715
5,820
5,704
Goodwill
3,812
3,291
3,190
3,812
3,291
3,190
Other intangible assets – net
1,352
1,275
1,310
1,352
1,275
1,310
Retirement benefits
2,996
3,539
947
65
64
61
(2)
(2)
(57)
3,059
3,601
951
8
Deferred income taxes
1,247
1,215
1,926
49
53
53
(192)
(231)
(255)
1,104
1,037
1,724
9
Other assets
1,767
1,646
1,683
516
499
656
(3)
(2)
2,280
2,145
2,337
Total Assets
$
38,077
$
39,152
$
35,715
$
53,110
$
51,624
$
50,849
$
(7,088)
$
(6,662)
$
(7,585)
$
84,099
$
84,114
$
78,979
Liabilities and Stockholders’ Equity
Liabilities
Short-term borrowings
$
1,554
$
1,509
$
352
$
10,859
$
9,410
$
9,559
$
12,413
$
10,919
$
9,911
Short-term securitization borrowings
5
10
14
4,001
4,595
4,092
4,006
4,605
4,106
Payables to Equipment Operations
5,669
5,564
5,955
$
(5,669)
$
(5,564)
$
(5,955)
6
Accounts payable and accrued expenses
11,370
11,198
10,074
2,534
2,015
1,926
(1,225)
(865)
(1,318)
12,679
12,348
10,682
7
Deferred income taxes
454
438
390
322
369
398
(192)
(231)
(255)
584
576
533
9
Long-term borrowings
8,556
8,915
10,124
23,891
23,973
23,222
32,447
32,888
33,346
Retirement benefits and other liabilities
2,855
4,239
5,253
111
107
109
(2)
(2)
(57)
2,964
4,344
5,305
8
Total liabilities
24,794
26,309
26,207
47,387
46,033
45,261
(7,088)
(6,662)
(7,585)
65,093
65,680
63,883
Commitments and contingencies (Note 15)
Redeemable noncontrolling interest (Note 19)
99
99
Stockholders’ Equity
Total Deere & Company stockholders’ equity
18,904
18,431
15,092
5,723
5,591
5,588
(5,723)
(5,591)
(5,588)
18,904
18,431
15,092
10
Noncontrolling interests
3
3
4
3
3
4
Financial Services’ equity
(5,723)
(5,591)
(5,588)
5,723
5,591
5,588
10
Adjusted total stockholders’ equity
13,184
12,843
9,508
5,723
5,591
5,588
18,907
18,434
15,096
Total Liabilities and Stockholders’ Equity
$
38,077
$
39,152
$
35,715
$
53,110
$
51,624
$
50,849
$
(7,088)
$
(6,662)
$
(7,585)
$
84,099
$
84,114
$
78,979
6 Elimination of receivables / payables between equipment operations and financial services.
7 Primarily reclassification of sales incentive accruals on receivables sold to financial services.
8 Reclassification of net pension assets / liabilities.
9 Reclassification of deferred tax assets / liabilities in the same taxing jurisdictions.
10 Elimination of financial services’ equity.
46
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF CASH FLOWS
For the Six Months Ended May 1, 2022 and May 2, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Cash Flows from Operating Activities
Net income
$
2,562
$
2,587
$
439
$
427
$
3,001
$
3,014
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision (credit) for credit losses
1
2
44
(26)
45
(24)
Provision for depreciation and amortization
518
543
530
581
$
(115)
$
(70)
933
1,054
11
Impairment charges
77
50
77
50
Share-based compensation expense
44
45
44
45
12
Gain on remeasurement of previously held equity investment
(326)
(326)
Undistributed earnings of unconsolidated affiliates
233
158
(3)
(2)
(232)
(145)
(2)
11
13
Provision (credit) for deferred income taxes
75
(170)
(38)
(43)
37
(213)
Changes in assets and liabilities:
Trade, notes, and financing receivables related to sales
(215)
(170)
(1,320)
(954)
(1,535)
(1,124)
14, 16, 17
Inventories
(2,201)
(926)
(64)
(267)
(2,265)
(1,193)
15
Accounts payable and accrued expenses
(99)
527
(7)
(1)
(337)
(208)
(443)
318
16
Accrued income taxes payable/receivable
(144)
77
5
(23)
(139)
54
Retirement benefits
(1,024)
(8)
4
3
(1,020)
(5)
Other
(103)
(163)
(114)
32
48
(70)
(169)
(201)
11, 12, 15
Net cash provided by (used for) operating activities
(646)
2,507
860
948
(1,976)
(1,669)
(1,762)
1,786
Cash Flows from Investing Activities
Collections of receivables (excluding receivables related to sales)
12,004
11,187
(814)
(820)
11,190
10,367
14
Proceeds from sales of equipment on operating leases
1,035
1,011
1,035
1,011
Cost of receivables acquired (excluding receivables related to sales)
(12,260)
(12,080)
289
721
(11,971)
(11,359)
14
Acquisitions of businesses, net of cash acquired
(473)
(19)
(473)
(19)
Purchases of property and equipment
(345)
(319)
(1)
(1)
(346)
(320)
Cost of equipment on operating leases acquired
(1,090)
(1,125)
86
361
(1,004)
(764)
15
Increase in trade and wholesale receivables
(2,159)
(1,246)
2,159
1,246
14
Collateral on derivatives – net
6
(1)
(254)
(254)
(248)
(255)
Other
(46)
(36)
(49)
(36)
24
24
(71)
(48)
13, 17
Net cash used for investing activities
(858)
(375)
(2,774)
(2,544)
1,744
1,532
(1,888)
(1,387)
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings
128
(84)
684
296
812
212
Change in intercompany receivables/payables
(424)
(562)
424
562
Proceeds from long-term borrowings
55
4,243
3,967
4,298
3,967
Payments of long-term borrowings
(308)
(30)
(3,317)
(3,127)
(3,625)
(3,157)
Proceeds from issuance of common stock
50
116
50
116
Repurchases of common stock
(1,226)
(1,044)
(1,226)
(1,044)
Dividends paid
(649)
(480)
(232)
(145)
232
145
(649)
(480)
13
Other
(27)
(34)
(19)
(13)
(8)
(46)
(55)
13
Net cash provided by (used for) financing activities
(2,401)
(2,118)
1,783
1,540
232
137
(386)
(441)
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash
(113)
124
3
27
(110)
151
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
(4,018)
138
(128)
(29)
(4,146)
109
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
7,200
6,156
925
1,016
8,125
7,172
Cash, Cash Equivalents, and Restricted Cash at End of Period
$
3,182
$
6,294
$
797
$
987
$
3,979
$
7,281
Components of cash, cash equivalents, and restricted cash
Cash and cash equivalents
$
3,167
$
6,282
$
711
$
900
$
3,878
$
7,182
Restricted cash (Other assets)
15
12
86
87
101
99
Total cash, cash equivalents, and restricted cash
$
3,182
$
6,294
$
797
$
987
$
3,979
$
7,281
11 Elimination of depreciation on leases related to inventory transferred to equipment on operating leases.
12 Reclassification of share-based compensation expense.
13 Elimination of dividends from financial services to the equipment operations, which are included in the equipment operations’ operating activities, and capital investments in financial services from the equipment operations.
14 Primarily reclassification of receivables related to the sale of equipment.
15 Reclassification of direct lease agreements with retail customers.
16 Reclassification of sales incentive accruals on receivables sold to financial services.
17 Elimination and reclassification of the effects of financial services’ partial financing of the construction and forestry retail locations sales and subsequent collection of those amounts.
47
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company’s most recently filed Annual Report on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.